Study on State of Practice in Credit through BCs from

Responsible Finance Lens

November, 2016

2

Contact

Access Assist

22 Hauz Khas Village, New Delhi

110016

www.accessassist.org

www.microfinanceindia.org

Responsible

Radhika Agashe

Author

Swati Mehta

Table of Contents

Executive Summary 3

Introduction 6

Background

Need and Relevance

Approach 8

Scope of the Study

Methodology

Overview of Credit BC Models Studied 10

Business Models Spectrum for Credit-BCs

Operational and Monitoring Structure of BCs

Operational and Monitoring Structure of Banks

BC Background and Outreach

Bank Outreach

Overview of Products and Processes 17

Product

Processes

Overall State of Practice 20

Service Level Agreements

Client Protection

Governance

Monitoring and Audit by BC

Monitoring and Audit by BC

HR Systems and Training

Key Recommendations 29

3

Executive Summary

In the past few years, the financial inclusion sector has seen a convergence of microfinance and the business

correspondent model, creating a win-win proposition for both. After years of slow growth post crisis, the

microfinance sector experienced a growth of 60 percent in the financial year 2015-2016. Though the aggregate

number of the industry is unknown, an increasing proportion of this growth is been fueled by MFIs and other

regulated bodies (NBFCs, companies) acting as Business Correspondent (BC) for banks. According to MFIN’s

Micrometer Report, for a group of 24 large MFIs accounting for almost 92 percent of the industry gross loan

portfolio, the portfolio under the BC model amounted to Rs.2,702 crores in June 2016. This increased from

Rs.2,484 crores in March 2016, and Rs.1,614 crores in December 2015 (a 67% growth in the portfolio from

December 2015 to June 2016). Besides these MFIs, there are also pure-play business correspondent

organisations handling credit portfolio of the banks (such as Sub-K and Gram Tarang which are also covered in

the study), for which aggregate portfolio size data is not available.

The MFIs are at an advantage in terms of access to funds and the BCs have finally found a financially viable

business model and product. The banks on the other hand are able to leverage the existing network and

strengths of the MFIs and BCs to reach out to the microfinance clients in a cost efficient manner. Due to this

strong value proposition, the banks and MFIs are increasingly inclined to this delivery channel. However, this

inclination has raised an unease at the industry level pointing towards current or potential client protection

issues and the need to have a code of conduct for concerned BCs.

This study was initiated by the Michael and Susan Dell Foundation to understand the current ‘state of practice’

with regards to client protection and the code of conduct adopted by the institutions involved. While the

process of developing code of conduct for BCs in general is underway, with support from Accion-Smart

Campaign, this study focusses on BCs delivering credit. The study was primarily conducted through case

studies of four credit BCs working with different banks by documenting the models and business processes vis-

a-vis the commonly accepted tenets and principles of client protection and responsible lending. It looks at

practices and policies on client protection, governance, human resource management and training, and client

education, internal audit and monitoring, and grievance redressal at both BC and bank level. The study will be

used to generate discourse on areas that need improvement and inform the process of developing a Code of

Conduct for the interaction between the BC and the client.

The study focused on pure-play BCs only with no MFI portfolio as they are not part of MFIN and Sa-Dhan,

limiting the existing knowledge and reporting of their practices. Three different types of business and

operational models were observed at the BC level. The key distinction is whether the BC has its own branches

and staff to deliver credit products, or have sub-contracted third party agents called Customer Service Points

(CSPs) or Bank Mitras (BMs) to do the same. The first two models deliver credit products through an MFI-like

model with branches and loan officers handling client groups. At the bank level, the operational structure

varies for private and public sector banks. The private banks, due to their limited branch network has

appointed dedicated staff to support the BC partners. In public sector banks, the BC business is driven by the

branch manager of the link bank branch which is in a radius of 30 kms from the kiosk.

All banks offer the standard group loan product, however, the group methodology used is both Self-Help

Group (SHG) and Joint Liability Group (JLG). The banks using SHGs are now transitioning to JLGs given the

challenges in reporting member level data to credit bureau and limitation of not being able to open individual

bank accounts of borrowers, they are shifting to JLG model.

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The costs of the loan mimics the typical MFI product, with interest on diminishing balance (15-26% per

annum), bundled credit insurance, and processing fees (of 1% on loans above Rs.25,000 as mandated by RBI).

Public sector banks in the study sample have a lower cost with no processing fees and a lower interest rate.

The processes adopted by the banks and BCs for delivery of the product, and the interface between the bank,

BC, and client is elaborated in the fourth section of the report.

The key observations on the study and on the state of practice adopted by the banks and BCs regarding their

credit operations is summarized as follows:

The business model and practices adopted by the banks have evolved as they gained more experience.

Initially, the banks appointed a variety of institutions such as NBFCs, Self-Help Group Promoting

Institutions (SHPIs), and small NGO-MFIs as their BCs. Two of the banks interviewed for the study have

more than 40 BC partners, but is now in the phase of consolidating based on their experience. The banks

which entered later have fewer (around ten) and bigger BC partners.

The Corporate BCs and MFIs acting as BCs do not have to comply with the guidelines similar to the Code of

Conduct applicable to the MFI members of MFIN and Sa-Dhan. However, all of them have signed

agreements with banks which mandates them to follow the lending fair practices code issued by RBI,

Indian Bankers Association, and Banking Codes and Standards Board of India. All banks have published

their “Lending Fair Practice Code” on their website.

The private sector banks covered in the sample were observed to have adopted aspects of the MFIN/Sa-

Dhan code of conduct for MFIs. For instance, they have limited the overall indebtedness level for each

client to Rs.60,000 to Rs.80,000, but could be third or even fourth lender. The public sector banks have

kept the limit to Rs.1,00,000 as per RBI guidelines.

The level of monitoring of credit operations is much higher in the BC model. This is because the banks

have stricter compliance and monitor the BCs on a daily basis. While they do not get into the specifics of

the processes adopted by BCs, they ensure robust systems through a strict due diligence while selecting

partners, periodic reviews and grading, daily portfolio quality monitoring, internal or external audit, and

risk sharing through First Loss Deposit Guarantee (FLDG).

The private banks have invested more resources in monitoring compared to the private banks. Two of the

private banks covered in the study have appointed local Product Sales Managers (PSMs) with closer

monitoring through participation in group training and group recognition tests.

The credit decision is always taken by the bank (either link branch or the PSMs) and the documents are

verified by bank personnel. All banks except for one interviewed for the study were conducting credit

bureau checks for the clients. Banks are now moving towards uploading client data on credit bureau on a

weekly basis.

The bank provides training to key BC staff on their products and processes. Training of the field staff or

CSPs is handled by the BCs. Two out of the four BCs interviewed did not have any documented guidelines

for their staff on client treatment.

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In the first two models with MFI-like branches, the staff mostly has prior microfinance experience. The

incentives also mimics the MFI model considering factors such as new enrolments, loan disbursed,

portfolio quality, and audit scores. In the third model, the supervisory staff or the CSP does not have prior

microfinance experience. The CSP commissions are fixed by the bank and paid on basis of loan amount

recovered.

The banks have specified, in their service level agreements, the BC’s responsibility to disclose all terms and

conditions of the products and conduct client education. They do not provide any marketing brochures,

but provide co-branded banners to be displayed at BC branches, loan sanction documents, and loan cards

or passbooks. Key information such as loan related costs, and do’s and don’ts are written on these

documents (in local language for all banks, except for one).

The governance structure in case of older and bigger BCs meets the standards provided in the MFIN/Sa-

Dhan code of conduct (e.g. independent directors, women directors). It is understood that the smaller or

relatively young BCs might not be complying to these. The banks do not mandate this for their BCs, but

consider this as an important criterion for due diligence.

Three out of the four BCs are conduct quarterly internal audits, and one has external audits. Two of the

BCs (with prior microfinance experience) have implemented concurrent audit or maker-checker

mechanism at the branches exhibiting strong internal controls.

In case of complaints of grievances, the first point of contact for customers is usually the BC branch. All

BCs have defined an escalation matrix in case of complaints. The banks have central toll free numbers,

which are communicated through loan documents. However, the number of complaints logged on the

helpline are very low. There is no formal mechanism for exchange of data between the BC and bank. A

more structured grievance redressal mechanism, especially at the BC level will be critical.

Based on the above mentioned observations of the study, a working group of banks, BCs, microfinance self-

regulatory organisations, and industry experts is developing a draft code of conduct for credit-BCs.

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Introduction

The Business Correspondent model was introduced by the RBI in January 2006 for ensuring greater financial

inclusion and increasing the outreach of banking sector. Several changes in the original guidelines have been

made over these 10 years in order to make the model more effective and corporate BCs were encouraged to

take up this critical task. However, with substantial investments in the model, BCs are yet to deliver on their

potential and are facing business viability and sustainability issues. In spite of these issues and concerns, it is

evident that the last mile connectivity that the BC channel provides cannot be delivered through branch

banking or other approaches. The emphasis therefore on improving effectiveness and viability of BCs needs

to continue.

Credit Through BCs: A Win-Win for BCs and Banks

A crucial aspect in the changing ecosystem is the evolution of Credit-Led

Business Correspondent Services through which most of the MFIs and

corporate BCs are partnering with some of large private banks to provide

credit to low-income groups. Though the aggregate number of the

industry is unknown, an increasing proportion of this growth is been

fueled by MFIs and other regulated bodies (NBFCs, companies) acting as

Business Correspondent (BC) for banks.

According to MFIN’s Micrometer Report, for a group of 24 large MFIs

accounting for almost 92 percent of the industry gross loan portfolio, the

portfolio under the BC model amounted to Rs.2,702 crores in June 2016.

This increased from Rs.2,484 crores in March 2016, and Rs.1,614 crores

in December 2015 (a 67% growth in the portfolio from December 2015

to June 2016).

There has been significant research and deliberation on issues related to

business model and viability of BCs, the discourse however on aspects of

business ethics, client protection and responsible operations through

agent banking has been limited. The recommendations of the RBI

Committee on Medium Term Path on Financial Inclusion covered some

aspects that would create a more responsible BC channel (such as

monitoring of BCs by link bank branches, creating a centralized registry

of all BC Agents, setting up a graded system of training and certification

of BCs, etc.). While these policy changes may come into effect over time;

there is critical need for the stakeholders to converge towards

developing comprehensive standards and code of ethics for bank-BC

model. ACCION SMART Campaign’s ongoing study towards building a

framework for responsible agent networks provides a starting point for

moving forward. This research, however, does not cover credit led

models, individual BCs, and banks.

Ongoing work on Client Protection in BC

model

Smart Campaign in collaboration with

Accion is currently building a framework

for responsible agent networks

IFC is supporting the Business

Correspondent Federation of India to

develop a Code of Conduct to be

adopted by all BCs.

What are Credit BCs?

Any institution registered as a Business

Correspondent with any bank and

offering credit products (group or

individual) is categorized as Credit BCs

for the purpose of this study and Code of

Conduct.

There are two sub-categories of credit

BCs. First, MFI working as a BC company

(e.g. Samhita) or a BC company

promoted by MFI (e.g. Taraashna

promoted by Satin Creditcare),

therefore, handling own and bank’s loan

portfolio. Second, pure-play BC

companies with no loan portfolio of their

own (e.g. Saggraha, Gram Tarang). These

pure-play BCs could be following credit

led or savings led model, and appointing

own staff or third part agents or “Bank

Mitras”.

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Besides these MFIs, there are also pure-play business correspondent organisations handling credit portfolio of

the banks (such as Sub-K and Gram Tarang which are also covered in the study), for which aggregate portfolio

size data is not available. The current fiscal year is expected to witness significant increase in credit services

through this model.

The delivery of credit through this model has proven to be a success story in the whole BC-led financial

services delivery channel. It offers a win-win formula for both bank as well the BC. The bank gets a low cost

channel for delivering their credit products to the microfinance client segments. The BC on the other hand is

no longer required to seek direct funding and can offer a wider range of banking products compared to NBFCs

and MFIs.

Client Protection Guidelines for Credit-BCs: Need and Relevance

Need to address Client Protection

issues in BC Model?

BC model has achieved significant

scale, however it has been crippled

by the challenge of financial viability.

The delivery of credit through BC’s

has become an important source of

revenue for BCs and have instilled

confidence in the model. However,

not addressing the client protection

issues may result in:

Reputation risk for banks and

BCs

Negative media and political

attention

Loss of consumer trust, and

hence uptake of products and

services offered

Dampen the business case for

BC companies

Currently, the Corporate BCs and MFIs acting as BCs do not have to comply

with the guidelines similar to the Code of Conduct applicable to the MFI

members of MFIN and Sa-Dhan. Absence of a unified code of conduct may

pose a threat to low-income vulnerable groups leading to multiple lending,

over indebtedness and distress.

The business models and processes for credit-led BCs being adopted by

MFIs/NGOs such as Cashpor, Samhita, and Swadhaar etc. are distinctly

different from pure play BCs. These partnership models of banks and BCs on

credit delivery are evolving and have not been documented and researched

so far. In MFI lending, designing the delivery models and processes are

under the full discretion of the MFI, and these have been streamlined to a

large extent post 2011 with the overarching Industry Code of Conduct

providing the guiding tenets for codes and ethics. However, for BC credit

operations, the processes are dependent on the model that the different

banks adopt in addition to the BCs internal processes and systems, and

anecdotal evidence points to a range of models being implemented.

The aspects related to responsible lending and client protection are

particularly important to be studied as part of the overall diversity of

models being adopted. This could potentially be the first step towards

engaging banks and BCs to share their current practices and contribute to

development of industry standards and guidelines that focus on protecting

customers as their models evolve and grow.

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Approach

Scope of the Study

The study covers the ‘state of policy and practice’ regarding the following aspects of credit BC operations

through case studies of four diverse models.

I. Client protection (Client protection principles of SMART Campaign)

Appropriate product design and delivery channels – Policies and practices for training of staff to

understand the product features and their implications on financial lives of their customers, bundling

of products, seeking client feedback for product design and delivery, mechanisms to avoid

‘aggressive sales’ by staff, policies for debt restructuring, internal control mechanisms to verify

effective application of policies and processes and management reviews related to the above

aspects.

Avoiding over-indebtedness – Processes and criteria for due diligence of clients before making a loan

including credit bureau checks, data sharing with credit bureaus including microfinance credit

bureaus, norms for decision making on amount of loan offered to client.

Transparency and disclosure of terms and condition including communication – Processes for

transparency on product terms, conditions and pricing, including their rights through appropriate

and accessible communication channels, mechanisms for clients to seek more information.

Pricing – Prices are market based and cover costs for the bank as well as BC, mechanisms for

analyzing costs and its implications on pricing and fees.

Treatment of clients – Guidelines for employee interaction and behavior with clients (code of

conduct), Collection practices, avoiding discrimination, provision of receipts to clients, processes in

place in case of default/non-repayment, documentation of sanctions on prohibited behavior, training

of staff on ethical behavior, mechanisms for reviewing adherence to code of conduct and internal

controls to identify and action on violation of code of conduct.

Privacy of client data – Mechanisms for data privacy and security – collecting, processing, using and

storage of client information, sanctions in case of violations, secure IT systems, policy and training on

communicating with clients on issue of data privacy and security.

Complaint resolution – Systems at both BC and bank level - Mechanism for reporting complaint and

resolution (dedicated resources for complaint handling), reporting to management and Board on

complaints, Systems for informing clients about their right to complaint and mechanisms, system to

collect, analyze client satisfaction and reasons for client drop outs, analysis of complaint data.

The objective of the study is to highlight the state of practice in delivery of credit through

the BC model at the sector level. The study will be used to generate discourse on areas that

need improvement and inform the process of developing a Code of Conduct for the

interaction between the BC and the client.

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II. Governance – Transparent, formal and professional governance system including composition of

Board (profile of members, proportion of independent directors), audit committee and other sub-

committees, availability of Governance policies etc.

III. Human resource – Appointment and training of staff/agents/CSPs, coverage of aspects that have

implications on responsible client service in training, agent turnover, loan accounts per agent etc.;

HR structure at bank responsible for BC management, orientation and training of bank team on BC

channel and aspects of client protection and responsible finance.

IV. Client education – Processes to raise client financial awareness including their rights and

responsibilities as borrowers, choices and options as a customer, and terms and conditions of

products; communication materials.

V. Agent management by banks – Criteria and processes of due diligence by banks for identification

of appropriate BC partners, processes of target setting/business planning, mechanisms for

monitoring performance including quality of client service, training and other support provided,

and mechanisms for penal action in case of process violation by BCs.

Methodology

The study was primarily conducted through case studies of four credit BCs working with different

banks by documenting the models and business processes vis a vis the commonly accepted tenets and

principles of client protection and responsible lending. The following methodology was deployed to

construct a general state of practice assessment based on the case studies covering both the banks

and the BCs.

Since the objective of the study is to highlight the state of practice at the sector level and not to

conduct assessments/reviews of specific institutions, the report does not critique or compare the

BC institutions or banks studied, and restrict to making a factual presentation of the practices.

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Overview of Credit-BC Models Studied

Case Studies: Business Correspondent Companies

1. Gram Tarang Invlusive Development Services Private Ltd. 2. Saggraha Management Services Private Ltd. 3. Kamal Fincap Private Ltd. 4. Basix Sub-K iTransactions Ltd.

Key Respondent Interviews: Banks and Non-Banking Financial Institution

Public Sector Banks: IDBI Bank, United Bank of India

Private Sector Banks: Yes Bank, RBL, IndusInd Bank

NBFC: Reliance Capital

As part of the study, four different BC institutions were visited to understand the overall state of practice.

Discussions with their partner banks were also undertaken to understand the policies and practices at the

bank’s level and to include bankers’ perspective in the review. The following section provides an overview of

the different credit-BC models covered, based on the parameters of: 1) Business Model Spectrum; 2)

Operational and Monitoring Structure of the BC; 3) Operational and Monitoring Structure of Bank); 4) BC

Background and Outreach; 5) Bank’s Aggregate outreach.

Business Model Spectrum for Credit-BCs

The business models adopted by banks and BCs for delivery of credit can be summarized into three types as

explained in the illustration below.

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The key distinction in the types of models is based on whether the BC has its own branches and staff to

deliver credit products, or have sub-contracted third part agents called Customer Service Points (CSPs) or

Bank Mitras (BMs)” to do the same.

Model 1: BC-Owned Branches

Under this model, just like a microfinance institution will set up its own branches. The area for setting

up the branches is always allocated by the bank, in agreement with the BC.

These branches are managed by the BC’s staff (typically branch manager and loan officers), who are

responsible for sourcing the clients, and disbursing and recovering the loan.

The business is mostly focused on credit, making it the entry point for the clients. Some BCs, also

offer other financial services as permitted by the bank (e.g. savings, insurance), but is only available

for the loan clients. Most banks aim to expand in future, the scope of services beyond credit to

achieve full financial inclusion for the clients.

The revenue of the BC is usually calculated as a share in the interest and fees earned by the bank.

Majority of the BCs handling credit portfolio for banks follow this model owing to closer monitoring

and higher control over the processes. Among the BC institutions studied Saggraha, Kamal Fincap, as

well as Sub-K follow this model.

Model 2: BC-Owned Branches and Third Party Kiosk or Customer Service Point (CSP)

This model applies to BCs that offer both asset as well as liability products on behalf of the same

bank and in the same area. Among the BC institutions studied, Sub-K follows this model for one of

the bank partnerships.

The asset products are delivered through the BC-owned branches that are responsible for sourcing

the client, conducting training and appraisal, conducting group meetings and ensuring recovery. This

is to maintain higher control over the credit process. However, if there is a CSP or kiosk of the same

bank in the area, then it is used for sourcing of clients and for supporting the appraisal. The CSP could

be used for cash management (i.e. for conducting transactions) as well.

The liability products offered by the banks for all bank clients (savings, remittances, etc.) are offered

by the CSP.

The revenue for credit product is based on the share in interest and fees.

Model 3: Third Party Kiosk or CSP (Bank Mitra)

This is the typical Bank Mitra model adopted for delivering financial inclusion services through the BC

model. The BC company sub-contracts local persons with a fixed service point/kiosk as the CSP. The

CSP is linked to the nearest bank branch.

The well performing CSPs also now facilitate delivery of credit product to their existing customers,

hence the entry point is commonly liability products. The CSPs are managed and monitored by the BC

staff. The level of control is lower compared to the first two models.

The CSPs are responsible for recovery and receive commission based on the amount recovered.

Operational and Monitoring Structure of the BC

As discussed the operational and hence the monitoring structure at the BC level varies depending on the

model adopted by them.

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Board of Directors

OperationsFinance and Accounts

CEO

Internal or External Audit

HR and Training IT and MIS

State/ Territory Head

Cluster/ Area Head

District Manager

BC Branch Head

Loan

Officers

Risk / MIS

Officer

Borrowers

BC Branch

Head

Loan

Officers

Borrowers

CSP /

Kiosk

Financial

Inclusion

Clients

CSP /

Kiosk

Financial Inclusion

Clients (including

borrowers)

Model2Model1 Model3

The illustration above summarises the operational structures in the three types of BC models discussed. At

head office level, all BCs have similar organizational departments. Three out of the four BCs had internal

audit function. The monitoring structure under the operations department is similar with the span of control

changing depending on the geographies covered.

At the field level, in Model 1 the BC branch is headed by the Branch Manager. There are 4-5 loan officers at

each branch depending on the portfolio size, and the loan officers are responsible for forming and managing

the client groups. Each loan officer handles 300-500 clients. There is an MIS or risk officer at the branch,

usually performing the role of the checker as an internal control function.

In Model 2, there are two separate structures for asset portfolio (same as model 1) and liability portfolio

(same as model 3).

In model 3, the CSP or the Bank Mitra at the kiosk is the main point of contact with the bank’s clients. They

are local persons from the village and have an already established banking relationship with the clients. They

are supported and monitored by BC company’s staff (district/area managers). Each bank mitra handles

anywhere between 30-50 clients.

Operational and Monitoring Structure of the Bank

There are two types of operational models observed at the bank’s level in the study. The models are different

for private banks and NBFCs (with lower branch presence in rural areas), and public sector banks (with local

branch presence).

Two of the three private banks have appointed Product Sales Managers (PSMs) which are local staff and

oversee 2-3 BC branches. They are involved in making the credit decision and for delinquency. The banks also

have central or zonal processing centres where loan applications and KYC documents are checked and

stored. The nearest bank branch could be as far as 50 kilometers.

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Agri and FIRisk Internal Audit

Business Analytics ProductBusiness and Sales

Head

Regional / Zonal Office

Product Sales

Manager (PSM)

Central Processing

Centre

Link Bank Branch

Branch Manager

CSP or BC Branch

(within 30 kms)

BC Branches

(2-3 per PSM)

PSMandcentralprocessingmodel,mostlyfollowedbyprivatebankswithlowerbranchnetworkinruralareas.

Linkbranchmodel,mostlyusedbypublicsectorbankswithcreditdecisionandprocessingatlocallinkbranch.

The public sector banks have a link branch model where the business is to be driven by the bank’s branch

manager. The documents are submitted to and verified by this link branch, and the credit decision is also

taken by the branch manager. Both the public sector banks covered in the study, currently do not have

dedicated staff at the branch to perform these roles.

BC Background and Outreach

GRAM TARANG

Key Outreach Metrics

# of States: 6

# of Districts: 44

# of CSPs: 1606

# of staff: 227

# of clients: 50,722

Total Loan Disbursed: Rs.

108.7 crores

Avg. Loan Size: Rs.15,000

Caseload per CSP: 32

Overdue 30 Days: 0.084%

Gram Tarang is registered as a private company and started its BC operations in April 2011.

It is working in 12 states as BC for technology service provider Genpact (formerly Atyati) on

behalf of 10 banks. It started its credit operations in August 2015 on behalf of United Bank

of India with a focus on East Indian states of West Bengal (with 85% of credit CSPs and 16

districts), Assam (14 districts), Manipur (4 districts), Tripura (7 districts), Orissa (3 districts),

and Bihar (planned). The entire loan portfolio is in rural areas.

It started as part of the NGO BREDS which had a good reputation in Andhra Pradesh,

working on grassroots challenges such as of livelihoods, community based institutions, and

environmental issues. BREDS started working on financial inclusion, and Gram Tarang was

later set up as separate for-profit entity. Both institutions are supported by Centurion

University, Orissa with their promoters having representation in Gram Tarang’s Board as

well.

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Key Outreach Metrics

# of States: 4

# of Districts: 26

# of Branches: 66

# of staff: 440

# of clients: 1,11,801

Loan O/S: Rs.178 crores

Loan Disbursed: Rs. 292 crores

Avg. Loan Size: Rs.23,000 –

Rs.24,000

Caseload per Loan Officer: 550

Overdue 30 Days: 0.004%

Saggraha is registered as a private company and started its BC operations in

September 2014. It has partnership with most banks’ engaged in this model – Yes

Bank, RBL, IDBI, IDFC, and Reliance Capital. Their branches are operational in 26

districts across 4 states - Karnataka, Tamil Nadu, Maharashtra, Madhya Pradesh.

They have sanctions for disbursing Rs.550 crores of loan from these banks. The

senior management has consciously decided to avoid urban areas, with 100% of

their portfolio in rural areas.

Saggraha has been promoted by three microfinance and banking professions with

extensive experience at senior management positions. Given this background,

Saggraha has developed and documented sound processes and risk management

practices. Due to this the BC enjoys high levels of confidence from their partners.

SAGGRAHA

Key Outreach Metrics

# of States: 2

# of Districts: 22

# of Branches: 32

# of staff: 251

# of clients: 47,121

Loan O/S: Rs.74.37 crores

Loan Disbursed: Rs. 140 crores

Avg. Loan Size: Rs.24,000

Caseload per Loan Officer: 315

Overdue 30 Days: 0.13%

Kamal Fincap was registered as a private company in 2015. However, it started its

BC operations in Rajasthan August 2012, for Yes Bank as Saarthi Credit

Cooperative Society. However, for expanding operations with the existing bank

partner (Yes Bank) neighbouring districts of Madhya Pradesh, Kamal Fincap was

registered since the existing entity did not have scope to undertake multi-state

operations. Over the next one year, they transferred the entire portfolio to Kamal

Fincap. They are operating in 17 districts of Rajasthan and 5 districts of Madhya

Pradesh, with equal proportions of portfolio in rural and urban areas.

Kamal’s management team and board has a cumulative experience of over 35

years in financial services and microfinance. It comes from the Kamal Company

and Group, a reputed family business in Rajasthan with early experience in

automobile and retail financing. They also have experience of microfinance since

2009 under Kamal Auto Finance Limited.

KAMAL FINCAP

Key Outreach Metrics

# of States: 6

# of Districts: 35

# of Branches: 115

# of staff: 753

# of clients: 2,85,599

Loan O/S: Rs.466.42 crores

Loan Disbursed: Rs. 1023.98

crores

Avg. Loan Size: Rs.25,000

Caseload per Loan Officer: 515

Overdue 30 Days: 0.47%

Sub-K started its BC operations in August 2010, and is currently working with 15

banks in 28 states and has mobilized savings of Rs. 1,005 million. It started its

credit operations with RBL in July 2015. In 2016, it partnered with United Bank of

India for credit operations in Rajasthan. Sub-K is currently providing business

facilitation services for credit in Maharashtra (17 districts), Chattisgarh (7

districts), Uttrakhand (4 districts), Uttar Pradesh (3 districts), Karnataka (3

districts), and Goa (1 district). They have equal proportion of branches in rural and

urban areas.

It has been promoted by the BASIX group, which is well known for its pioneering

work in financial inclusion and livelihoods. It has a well-established senior

management with experience of microfinance industry.

SUB-K

15

Growth Trend and Performance of BCs

GRAM TARANG (Operations started in August 2015)

SAGGRAHA (Operations started in September 2014)

KAMAL FINCAP (Operations started in August 2012)

SUB-K (Operations started in July 2015)

16

Bank Outreach

The earliest banks to experiment with the credit-BC model are Yes Bank and IndusInd, followed by other

private and public sector banks RBL, IDBI, and United Bank of India. These banks have found success in using

this model to quickly scale up its credit outreach in rural areas, especially those that have worked with

established microfinance institutions – both NBFCs (with their BC subsidiary) or with smaller NGO MFIs.

As per data available for four out of the five banks interviewed for the study, then together own a BC

managed credit portfolio of Rs.7450 crores. Two of these banks have partnered with only a few selected BC

partners (on average 10), and these are all large corporate BCs, mostly with strong experience of NBFC MFI

operations. The other two have a larger number of BC partners (on average 50), with a mix of large BCs as

well as smaller and more local BCs or NGO MFIs. The type, experience, and number of BC partners have

critical consequences on the level of monitoring required by the bank. Some banks have experimented with

different variety of BCs, while others have preferred to stick with only large experienced MFIs.

All banks have a mix of rural as well as urban portfolio, with more than 50 percent of the portfolio in rural

areas. They plan to continue their focus on rural areas, as urban markets become overcrowded and

competitive.

17

Gram Tarang SaGgraha Kamal Fincap Sub-K

Product offered

BSBDA; Mudra loans (JLG); accident insurance under PMBY (no credit insurance)

Micro-loans (JLG/SHG); credit insurance; savings (RBL); consumer durables; small business loans (planned)

SHG loans (transitioning to JLG loans); Credit insurance

JLG loans; Micro enterprise loans (planned with UBI); Credit insurance; Savings for loan clients (RBL)

Loan amounts for each cycle

1st cycle: Rs.15,000 (up to Rs.30,000 in case of taking over loans from MFIs)

2nd cycle: Rs.50,000

3rd cycle: Rs.1,00,000

1st cycle: Rs.20,000 to Rs.26,000

2nd cycle: Rs.35,000

Rs.20,000 to Rs.35,000

1st cycle = Rs.20,000 2nd cycle =Rs.26,000 3rd cycle = Rs.30,000

Collections frequency

Weekly Monthly Bi-weekly or monthly

Monthly

Tenure 1 year 18 to 24 months 48 weeks or 18 months

18 to 24 months

Interest rate (diminishing balance)

13.5% (women)/ 14% (men)

24% to 26% 26% (for SHG) 24% (for JLG)

24% to 26%

Processing fees

Nil 1% (above 25,000) No processing fees for IDBI

1% (for loans above Rs.25,000 in case of JLG)

1% (above 25,000)

Overview of Products and Processes

The products offered by the BCs are developed by the bank and the BC is not allowed to bundle or offer any

other product without the bank’s approval. In terms of processes, the bank provides a general guidance

while keeping the credit decision with them. The details of the processes are left to the BC, and the bank

does not provide any specific or standard procedures.

Products

The table below summarises the products offered by the BCs (on behalf of the banks). All of them offer the

standard group loan product, however, the group methodology used is both Self-Help Group (SHG) and Joint

Liability Group (JLG).

IDBI and YES Bank are lending through the SHG model. While

large proportion of their portfolio is currently through SHGs,

both banks are transitioning to the JLG method. However,

none are following the classical SHG model where the loans

are based on group’s savings. Since these banks started soon

after the crisis, they partnered with local SHPIs. Given the

challenges in reporting member level data to CB and

limitation of not being able to open individual bank accounts

of borrowers, they are shifting to JLG model.

• Group is the borrowing

unit

• No savings at SHG level

• Power of Attorney to 3

members to sign for SHG

• Bigger group size (10-20)

• Member level reporting to

CB

SHG JLG

• Loans directly to

members

• No processing fees for

loans < Rs.25,000

• Individual members sign

all documents

• Group size of 5-7

• Member level CB

reporting

18

In addition to the credit products, Gram Tarang also offers other financial inclusion products such as opening

and operating basic savings bank deposit account, and insurance schemes under PMJDY. They have bundled

the credit product with the accident insurance under Pradhan Mantri Suraksha Bima Yojna. All other BCs

offer credit insurance either by themselves (approved by bank) or as provided by the bank. Gram Tarang

offers a higher first cycle loan in case of ‘takeover loans’ i.e. used to repay an ongoing higher interest loan

from an MFI. One of the banks is also collecting small savings (Rs.100) with each loan installment from the

clients. This can be withdrawn using micro-ATMs provided to each BC branch.

The public sector banks are not charging any processing fees on loans. The private banks are charging 1%

processing fees for loans above Rs.25,000 (based on RBI guidelines).

Processes

The illustration below summarises the process for group formation, disbursement, and collection, drawing

distinction between the interface between Bank, BC and the client. The interface between the bank and the

client is limited to where the amount is credited to or debited from the loan account of group or individual

client. All face-to-face interaction is happening between the BC staff and the client.

Bank- BC BC- Client Bank-Client

VillageSurvey(surveydonebyBCandapprovedbybank;incaseof

Model1and2)

ProjectionMeeting

GroupFormation

CGTandHouseVisits(byloanofficers)

GRTandHouseVisit(byBCbranchmanager,PSMorlinkbankbranchmanagers)

CBCheck(couldbebeforeorafterCGTandGRT;donecentrallyby

bankorBC)

LoanApproval(bybank– centrallyorlinkbankbranch)

AmountCreditedtoBC’sDisbursementA/c(inModel1)

AmountCreditedtoClient/Group’sLoanA/c(in

Model2and3)

DisbursementatBCBranchorKiosk

CollectionatcenterorKiosk

AmountDepositedintoBCCollectionA/c(inModel1)

AmountDepositedintoClient/GroupA/c(inModel2and3)

DelinquencyManagement

1 2

3

45

6

7

8

8

9

10

11

11

12

A few important points to be noted in the process are as follows:

In the PSM model, the PSM is responsible for conducting GRT and verifying the documents. RBL has a

bank loan committee (BLC) consisting of 2-3 PSMs which take the credit decision. In the link branch

model, credit decision is to be taken by branch manager, but they are dependent on the BC’s appraisal.

The entire process from group formation to disbursement typically takes at least 15-20 days on average.

This is longer compared to the MFIs, however, banks are looking to use technology to make the process

more efficient.

19

The account is opened for either the group (in case of SHGs) or for each individual member (in case of

JLGs). All disbursements are made through these accounts. For collection, in case of Model 3, the clients

deposit the instalments into their own account at the CSP / kiosk. In case of Model 1, the collections are

made in cash at the centre meeting and then deposited into the local bank account of the BC branch. On

the next day, the BC centrally transfers the collection amount to their collection account opened with the

partner bank.

Loan utilisation checks are not mandated by the banks, but three of the BCs are conducting it for 100%

groups.

20

Overall State of Practice

The following section presents the overall state of policies, practices and procedures in the BC-credit model. It covers an analysis and comparison – 1) Service level agreements between the bank and BC; 2) Code of conduct, if any, followed by banks and BCs; 3) Client protection policies and practices at BC and bank level; 4) Governance structures put in place by the BC; 5) Internal controls and audit systems of BC; and 6) Monitoring and audit by banks. The section also highlights some best practices followed by the BCs and banks. 7) HR and training systems of BC and bank.

1. Service Level Agreements Between Bank and BC

All banks are seen to have standard agreements with their BCs specifying the following at the minimum:

• Duties and obligations of BC: The tasks and duties to be performed by the BC such as the products

and services to be delivered, KYC verification and documentation to be completed, customer training,

cash management, branding at the branch / kiosk, and so on.

• Duties and obligations of the bank: The bank on the other hand is responsible for providing all

information, material and training related to the product. They have to provide all required support

to BC through link branch, provide application forms, and any technological equipment for

conducting transactions.

• Follow bank and RBI’s code of conducts: The BC must follow any code of conduct issued by the bank,

RBI, or any other relevant institution communicated from time to time.

• Privacy of data: BC must ensure that the client data or any other confidential information is not

shared with third parties.

A few banks have provided detailed code of conduct on the collection process. Two of the banks require, in their SLA, for each field staff to sign the code. Two banks in particular have provided detailed guidelines on staff behaviour and tele-calling.

• Right to monitoring and audit: The BCs are required to cooperate with any

monitoring and audit requirement of the bank.

• Terms of business model: All agreements provide details on the fees shared with

the BC and risk sharing in case of defaults. On average the BCs share 5% of the

default risk.

• Scope of services and product details: The agreement also clearly specifies the scope

of services for the BC, the products to be offered, and related pricing details. The BC

also cannot charge any additional fees from the customers.

• Exclusivity of services: It specifies the clause of ‘exclusivity’ where the BC cannot

offer any other provider’s products or deliver its own credit products in the same

area/geography.

All banks provide reference to BC’s responsibility to follow guidelines and code of conduct issued by RBI,

IBA, and Banking Code and Standards Board of India. None of the banks prescribe specific processes and

risk management practices, and have left this to the BC. The BCs are free to ensure processes and internal

controls based on their model.

1. Code of Conduct

At the BC level, Saggraha is the only BC which has developed its own code of conduct (adapted from MFIN-

Sa-Dhan COC) and standard one page guidelines for field staff specifying the critical do’s and don’t’s to

follow.. Kamal Fincap has documented do’s and don’t’s as part of their operations manual and

communicate to the staff through training.

21

At the bank level, as explained in previous point, most banks provide reference to RBI’s “Fair Practices Code of Conduct” in their SLA, with one providing a detailed code of conduct to be signed by field staff. All banks have published their “Lending Fair Practice Code” on their website. This code covers declarations to ensure full disclosure to customers, appraisal process and communication in case of rejection, documentation provided, collection practices, and grievance redressal. This has been mostly adapted from the RBI guidelines, which are applicable for all borrowers of the bank.

For microfinance lending, most banks have adapted aspects of MFIN-Sa-Dhan code of conduct in their policies, products, and processes. For example, three out of five banks have kept lower limits on overall indebtedness per borrower at Rs.60,000 to Rs.70,000, even though RBI has prescribed this limit at Rs.1,00,000.

However, the code of conduct and SLAs are not standard across banks. For example, the code of conduct or SLA does not provide standard guidelines such as for training of BC staff, client education specifically through compulsory group trainings (CGT), policy on product bundling, and HR practices at BC level, grievance redressal at BC level, and handling defaults.

Code of Conducts and Circulars Issued by RBI and Banking SROs Reserve Bank of India

– Master Circular - Fair Practices Code for all NBFCs and RNBCs, July 1 2015 (https://rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9823)

– Guidelines on Fair Practices Code for Lenders for all commercial banks, May 5 2003 (https://rbi.org.in/Scripts/NotificationUser.aspx?Id=1172&Mode=0)

– Master Circular - Lending To Priority Sector, July 1 2011 (https://rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=6603)

– Priority Sector Lending-Targets and Classification, April 23 2015 (https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=9688&Mode=0)

Indian Banks Association – Bankers' Fair Practice Code - effective June 2004 – Fair Practice Code for Credit Card Operations (http://www.iba.org.in/fpc_credit.asp) – Model Code for Collection of Dues and Repossession of Security

(http://www.iba.org.in/Model%20Policy/d)%20IBA%20Model%20Policy%20on%20Collection%20of%20Dues%20&%20Repossession%20of%20Security.pdf)

Banking Codes and Standards Board of India – Code of Bank’s Commitment to Customers, Jan 2014 (http://www.bcsbi.org.in/Pdf/CBCC2014.pdf) – Code of Bank’s Commitment to Micro and Small Enterprises

(http://www.bcsbi.org.in/Codes_MSE_lending.html)

2. Client Protection

The study also gauged the policies, practices, and procedures of the BC institution as well as the bank in

light of the seven client protection principles. Overall, it was found that the rigour varied across the BCs

and to some extent banks.

The key findings on each of the client protection principles is elaborated below. Please refer to approach

section for description on what each of principles entails.

22

Appropriate product design and delivery channels

– Since the product is offered by the bank, the BC does not have any control over the product

features. The back-end processes and requirements, for instance, KYC verification and credit

bureau checks are defined by the bank.

– The front-end processes are developed by the BC depending on the type of model (PSM model or

link branch model).

– Staff of the BC or CSPs are trained on product features and pricing mostly by the BCs. In case of

the PSM model, since dedicated staff are available, they are also responsible for training of the

BC staff.

– BC has put in place adequate internal controls (such as house visits, document verification, tele-

calling from head office) to avoid ’aggressive sales’. These are also checked through monitoring

and internal control. Moreover, all banks stressed upon quality of portfolio and not putting

undue pressure of targets on the BCs and their branches.

– There is no written policy for debt restructuring by BCs since the loans are in the books of the

banks. Any risk of default is being covered under the agreement as first loan deposit guarantee

(FLDG), where the BCs share on average 5% of the risk.

– The banks and BCs were observed to have no formal mechanisms for taking feedback from clients

on product design and delivery. The helpline numbers established by bank or BC handle grievance

redressal.

Best Practices Indebtedness limit set by banks at Rs.60,000 to Rs.80,000 based on MFIN/Sa-Dhan Code of Conduct Concurrent audits and risk checks at BC branches RBL has invested its human resources at field level to mitigate risks (monitoring, GRT). YBL is also adopting similar process. Saggraha has consciously kept 100% portfolio in rural areas

Avoiding over-indebtedness

– All BCs were observed to have well-documented process for group formation,

appraisals, and loan approvals. The staff are incentivized by all BCs/banks on the

quality of portfolio and recovery of loan amounts.

– In case of RBL and Yes Bank, they are involved in the group recognition test or

compulsory group training, to verify documents as well as conduct their appraisal

of the clients.

– The private banks have been more cautious with the overall indebtedness limit per

client, setting it at Rs.60,000 to Rs.80,000. However, they could be the third or

fourth lender for the client. The public sector banks have kept the limit at

Rs.1,00,000.

– All banks and banks except for United Bank of India are conducting credit bureau

checks either themselves or through the BC partners. Two banks IDBI and IndusInd

have provided login ID for credit bureau to their BCs, but the report has to be

shared with the bank along with remaining documentation. Most banks are now

moving towards updating of credit bureau data on a weekly basis.

– While deciding on new geographies for expansion, the banks base it on credit

bureau check and primary research to ensure high quality of portfolio in the area.

They also do a competitive analysis and avoid areas which have high presence of

MFIs.

– Two of the BCs studied have built strong internal control system with concurrent

checks or audit at BC branch enabling the maker checker system. They have a risk

or audit officer reporting to operations or audit team, playing the role of the

checker.

23

• Transparency and disclosure of terms and conditions including

communication

– All costs related to the loan product such as interest, processing fees,

and insurance premium are communicated through the compulsory

group training (in model 1 and 2) and through the loan documents

– This is highly controlled under Model 1 and 2, which has a robust

monitoring structure and maker-checker mechanisms. The three BCs

under this model have loan documents and group files with key

information in local language. In case of RBL and Yes Bank, as

discussed earlier this is checked by the PSM during GRT. In Model 3,

and disclosure and client education is dependent on the CSP and thus,

the control is lower. The clients of Gram Tarang and United Bank of

India are provided only a passbook which was in Hindi and English only

(not in local language Bengali). The loan card was not provided to all

customers visited during the study.

– Some BCs have attempted to standardize the CGT modules to ensure

dissemination of uniform information. Saggraha has developed a video

training which is shown to clients on third day of the training at the BC

branch. Kamal Fincap has recently developed and are implementing

use of a written standardised script by the loan officers to conduct

CGT. Their loan officers also recite an oath at the start and end of

collection meetings, which reiterates the loan amount and costs. They

also have a centralised team conducting pre and post disbursement

calls to all group clients to re-iterate the terms and conditions of the

loan.

– All the BC branches and CSPs / kiosks need to have the bank’s banner

and standard displays mandated by the bank. This is provided by the

bank. None of the banks have provided any brochures or pamphlets

for customers. In case of RBL and Yes Bank, all other documents to be

given to customers (application form, sanction letter, passbooks, loan

cards, etc.) are co-branded with bank and BC logos. In United Bank of

India, the loan documents were not observed to be co-branded.

– All loan clients are provided receipts for transactions conducted by the

BC. In case of United Bank of India, the customers who have registered

their phone numbers also receive SMS notifications.

Pricing

– The interest rate charged to the customer is fixed by the bank, but it

may vary from one BC to another for the same bank based on

negotiation. The BC negotiates the remuneration which is a share in

the interest and fee revenue earned by bank, and this could affect the

interest charged to customers. The pricing mimics that of the MFIs

with interest on diminishing balance, processing fees, and credit

insurance.

– Public sector banks have lower interest rates o(less than 15%) and thus

lower margins. They do not charge any processing fees. Private banks

charge interest rate between 24%-26%, plus a processing fees of 1%

for loans above Rs.25,000. All banks are of the opinion that the rate

CSP Banner at Gram Tarang Kisok

Saggraha clients shown training

video during CGT

Passbooks provided by United

Bank of India to all BC clients

Loan passbooks provided to Yes

Bank clients of Kamal Fincap

24

Treatment of Clients

– Saggraha has developed and documented written a code of conduct for their field staff known as

“10 mandates of client treatment”. This is to be pasted in the field diary of all field staff and

followed at all time. Other BCs do not have any formal code of conduct on client treatment, but

communicate to their staff or CSP through training and operations manual. None of the BCs

require their staff to sign any declaration on client treatment.

– Any cases of deviation or misbehavior with clients is tracked through monitoring visits by

supervisors (e.g. through surprise centre visits in Model 1 and 3) or through audits.

– The BCs or the bank-BC SLA do not have any written policy on client discrimination. The fair

practices code of the bank (based on RBI circular) specifies that bank will not discriminate against

any clients.

– The BCs have the right to refuse loans based on initial assessment. However, once the loan

applications have been filled, in case of rejection the BC is obligated to inform clients about the

reason. The mode of communication, however, is not defined.

– In case of defaults, the BCs have defined an escalation matrix. The loan officer has to inform the

branch manager, and if the amount is not recovered then it is escalated to high levels. The BCs do

not have written policy on client treatment in case of defaults.

– RBL has detailed the process and practices to be followed by partner BCs in their SLA. All other

banks cover this aspect in their fair practices code.

– The bank is able to note any deviations or cases of misbehavior through their local staff (PSM,

branch staff), during audit, or through their helpline (limited calls received).

Privacy of client data

– All BCs have online MIS where all the data is backed up on the cloud.

– The BCs have provided restricted access rights to the branch staff to protect client level data. For

instance, the staff of one branch can access data of only that branch’s customers and access only

data required for their workflow.

– No written policy on data protection was observed at the BC level.

Complaint resolution

– All banks have a toll free helpline number which is used for their general business as well. This

has been communicated to all the customers through loan cards or passbooks, and through

banners at BC branch or CSP kiosk. Banks have a section on grievance redressal in the lending fair

practice code.

– The banks require BCs to have some mechanism for grievance redressal, however, there is

flexibility on specifics of the mechanism.. Depending on the size of operations and resources

available, some BCs have dedicated helpline numbers to handle complaints, while others provide

numbers for branch or head office. All BCs have a defined escalation matrix for handling

complaints.

– In most cases, customers contact the BC branch as the first point of contact in case of complaints.

As informed by the banks, number of calls received on the central helpline is very low.

– There is no formal mechanism for compiling and sharing complaints between the bank and BC.

The reports are shared informally between bank and BC during monthly review meetings, if any.

– The grievance redressal mechanism needs a more structured system, especially at the BC level.

While resolving complaints is a priority, the system for collecting, recording, and reporting on

complaints is still to be developed.

25

Gram Tarang Saggraha Kamal Fincap Sub-K

Board of Directors

Four directors including MD and promoters from Centurion University

Three promoters Four family members including the Managing Director

Six directors (including MD, Director, and a venture capitalist)

Independent Directors

No

Not yet (will be appointed after investor comes on board)

Two independent directors (Microfinance practitioner and ex-banker)

Three independent directors (banking technology and banking experience)

Women Directors

Yes No Yes Yes

Sub-Committees

NA HR and compensation, audit, grievance

HR and audit Executive, audit, HRD committee

3. Governance

Two out of the four BCs (Kamal Fincap and Sub-K) have a full board of directors, meeting the requirements

for independent directors and women directors. Both BCs are relatively older organisations with prior

microfinance or financial inclusion operations. Saggraha has only its prompters as part of the board, but is

looking to appoint the independent director once they have their equity investor on board, so that

investors’ opinion is also considered. Gram Tarang’s board has its managing director and promoters from

its supporting organization Centurion University. The governance structure of all BCs is summarised in the

table below.

The bank, as part of their SLA does not require the BCs to have board of directors or specific sub-

committees. However, governance structure is considered as a key parameter while assessing the BCs.

Banks prefer BCs with more robust governance and reporting.

4. Monitoring and Audit at BC

The banks have not specified the type and frequency of internal audits to be implemented by BCs.

However, like governance this is also one of the criterion for assessment and due diligence of BCs. The BCs

are responsible for maintaining portfolio quality through adequate monitoring and risk control systems.

The BCs also have to share risk for default through its FLDG (on average 5%). Hence it is assumed that BCs

will put in place proper internal controls and audit systems to monitoring portfolio quality.

Gram Tarang does not have an internal audit team, but conducts quarterly audit through an external

statutory auditor on a sample basis (for entire BC operations). The external audit reports to the managing

director. A financial auditor conducts quarterly review and annual audit of all their financials. The line

management is responsible for monitoring of the field activities. Each Area Manager (the bottom most

tier) manages 30 to 35 CSPs on an average. They also receive MIS reports from their technology service

provider Genpact (Formerly Atyati) on a weekly basis, which are used for monitoring.

26

Gram Tarang Saggraha Kamal Fincap Sub-K

• External auditor conducts quarterly audits, and reports to MD

• Financial auditor conducts quarterly review and annual audit

• Monitoring structure is put in place through line management and weekly MIS reports sent by Atyati

• Quarterly audits of the branches (collection meetings and branch), reports to the promoters

• Audit templates shared with the bank

• Maker-checker concept with an operations manager at each branch

• Monitoring through MIS

• Each branch has Audit Officers conducting concurrent audits at branch and surprise centre visits, reporting to risk officers (per 5-6 branches) and IA head

• System based monitoring by Audit Officer at HO

• Incentives of branch staff aligned to audit rating

• Tele calling from HO pre and post-disbursement

• Quarterly audit for all credit branches

• One audit officer allocated for every 10 branches

• Head office and IT audit conducted every quarter

• Audit committee meets on half yearly basis

• Statutory audits have management meeting on quarterly basis

Sub-K conducts internal audit on a quarterly basis where 100 percent of the branches

are to be covered. They have one audit officer allocated for ten credit branches. The

audit officer conducts branch audit, 3 to 4 centre visits, and any other processes

ongoing in the field. They select portfolio of three different loan officers. Audit officer

also visits the overdue centres. The reporting to the audit committee is done on a half

yearly basis. The audit reports are also shared with the bank partners. Besides field

audit, head office and IT audit is conducted every quarter. Sub-K also has statutory

auditors that have management meetings on quarterly basis. Their monitoring is also

largely data based, where all end of day reports are sent by all branches and it is

compiled to prepare reports and performance dashboards for senior management.

Best Practices Concurrent audit at the branch level conducted by two BCs. Online MIS is used for daily reporting by all BCs. Kamal Fincap has HO team which makes pre and post disbursement calls to all borrowers.

Saggraha conducts audit of all branches every quarter, including audit at collection meetings followed by

branch audit. They share audit checklists and audit plans with their bank partners as well. Other than the

audit, Saggraha has implemented the maker-checker concept for each branch. They have an operations

manager at each branch which is checker for the tasks done by loan officers. This ensures monitoring on

an ongoing basis. The monitoring is largely system based with their in-house MIS, which is at par with

NBFC-MFIs.

Kamal Fincap conducts concurrent audit and does not have any periodic audits. There is an audit officer at

each branch which is not part of the line management, and reports directly to the internal audit

department. The audit officer reports to a risk officer who is responsible for five branches. The audit

reports are submitted to audit department on a monthly basis. The audit officers have to conduct house

visits for 100 of the clients and also conduct surprise centre visits. The observations from these visits are

recorded in their MIS ‘Bijli’. Kamal Fincap has found concurrent audits to be an effective way to put in

place internal checks and identify early warning signals. All branches are graded based on their audit

reports, and this becomes an important parameter for staff incentive calculation. Apart from this Kamal

Fincap also has an audit officer at the head office responsible for audit of MIS and analysis of field data to

gauge any anomalies. A tele-calling team is also put in place at the head which conduct pre and post

disbursement calls to check any fraudulent activities. This team reports to operations team.

27

5. Monitoring and Audit by Banks

The private banks were observed to have more intensive monitoring systems and have invested in

multiple layers of monitoring. All have a central business data analytics team which analyzes portfolio and

credit bureau data) and an independent risk and audit team. The internal audit team is responsible for the

BC credit portfolio as well, conducting quarterly audits. IDBI bank conducts independent third party audit

of the BC operations, and the frequency is dependent on the size of portfolio and risk assessment.

For monitoring, RBL is more hands on with operational monitoring with their PSM model. The PSMs are

responsible for conducting the group recognition tests which is taken into account for making the credit

decision. The credit decision is also made by the bank loan committee consisting of two to three PSMs.

They are also responsible for conducting monitoring visits to collection meetings and follow up with

default clients. Yes Bank is also adopting this model, but do not have adequate resources in the field yet to

monitor all client groups. However, the downfall of this approach is its high cost and RBL is thinking of

more efficient system based monitoring for the BCs where they have a good performance record.

In public sector banks IDBI and UBI, due to the link branch model, monitoring is dependent on the branch

manager. The local branch staff has to conduct monitoring visits to the BC branches / kiosk and client

groups on a random basis. There is no separate team for monitoring and credit decision is based on the

BC’s appraisal. The level of monitoring is relatively lower, and IDBI agreed to the need to add more

dedicated resources to improve monitoring. As the business is evolving, they are considering to improve

operational oversight. As more public sector banks with the link branch model adopt this model and

scales up, lack of effective monitoring and audit systems could emerge as a major challenge.

28

BCs receive training on the products and processes, and in some cases training material from the bank. But

they are largely responsible to develop and conduct training for their branch staff or CSPs. In the PSM

model, the PSMs are also responsible for participating in training of branch staff.

In the BC owned branch based models, all new staff receive a standard induction training at the head

office followed by on the job training at the branch. Refresher trainings are conducted on need basis, or

through regular review meetings and monitoring visits. The BC branches were observed to have detailed

operational manual for the staff’s reference. In case of CSPs, the training is conducted by the Gram Tarang,

with support from Genpact for technical training. The CSPs are also required to be certified in IIBF BC

training.

Based on a limited review of the training system, it is observed that BCs and banks could consider

introducing more structured training systems specifically covering aspects of client protection, sensitivity

towards clients, and code of conduct for client treatment.

For incentives, in Model 1 and 2, the incentives for the branch staff is based on

the BC’s discretion. All three BCs have developed parameters for staff incentive

calculation. Saggraha considers number of enrolments, disbursement amount,

and repayment rate for incentive calculation, and also has disincentives on

rejections and errors in application forms. Kamal Fincap provides incentive based

on number of new clients, share of agri-portfolio, and audit grading. Sub-K

provides incentives on amount disbursed, number of accounts, and overdue

amount (disincentive). In model 3, the CSPs are paid a fixed salary of Rs.3500 per

month, and incentives based on enrolments, value of transaction, recovery of

loans, collection of bad loans, sale of other products. The salary and incentives

are fixed by the bank and a share of this is retained by the technology service

provider Genpact and BC Gram Tarang.

Best Practices Saggraha provides ESOPs till cluster manager level and bi-monthly payouts to field staff. They ensure continuous employee engagement. Sub-K has local staff and friendly HR policies, due to which the employee attrition is low.

6. Human Resource Systems and Training

In Model 1 and 2, where the BCs have a branch based MFI-like model, the HR policies and manuals were

well documented and available at the branches. All BCs conduct reference check for new recruits, and most

of their branch staff have prior microfinance experience. Both Saggraha and Kamal Fincap had a transfer

policy for the branch staff. Sub-K on the other hand employ local staff, and hence there are no transfers. In

Model 3, the CSPs are third party agents and hence the HR policies are not applicable for them. Both CSPs

and their supervisors (area and district managers) are local staff and are not transferred. They may or may

not have direct microfinance experience, but have experience in agent network management.

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Key Recommendations

The following section presents the key recommendations based on the study. These have been categorized into recommendations to improve BC-credit operations and recommendations to develop and implement a code of conduct for credit-BCs.

As noted in the previous section, the state of practice with regards to the code of conduct and client

protection varies across different models. It was evident that the level of monitoring and control in case of

the CSP model is lower, compared to the MFI-like models. As the BC-credit model is scaled up, especially by

public sector banks which might want to leverage their existing networks of CSPs or Bank Mitras, this could

result in higher credit risk. Even in the MFI-like BC model, there are differences in application of the code of

conduct across different banks and BCs. While the lenders fair practices code serves as the base, some but

not all banks have partially adopted the MFIN/Sa-Dhan code of conduct. Thus, it will be useful to have a

standard code of conduct based on best practices, as a ready tool to adopted once the model is scaled up.

The recommendations based on the study have been clubbed into two categories. First is the areas of

improvement in the operation and implementation of credit-BC model as observed in the study. Second is

recommendations for developing and implementing the code of conduct.

Areas of Improvement for Credit-BC Operations

While the scope and sample of the study was limited, it is still valuable to highlight some of the areas of

improvement observed by the team and suggested by the participating stakeholders (banks, BCs, and

working group). These recommendations are as follows:

Internal audit and monitoring in CSP model: As noted in the monitoring section, the absence of robust

internal audit and monitoring at the bank and BC level in the CSP model might increase credit risk once

the model is scaled up. It is necessary that dedicated resources are deployed for ongoing monitoring

and regular audits of the BC operations.

Transparency and client education in CSP model: Owing to the lack of dedicated resources for

monitoring in the CSP model, enough attention is not paid to monitor client education processes, and

transparency and disclosure. This needs to be secured by providing client education material to CSPs,

loan documentation and sanction letter in local language to the clients, and display to key information

at kiosks. The process of CGT could be considered for the CSP model as well.

Training of BC staff on client protection principles: While various aspects of client protection are

ensured through processes and systems (e.g. monitoring and CGT), it is critical for the BC staff to

understand why these are important. Training could be provided on the bank and BC’s commitment to

client protection principles, and the systems and processes put in place to achieve them.

Grievance redressal mechanism: While all banks have established central helpline numbers, they

agreed that very few complaints are received on that. In most cases, the grievances are received by the

BC branch and thus redressal mechanisms at BC level are more important. Also a structured and formal

mechanism of sharing grievance reports between bank and BC is not present right now and will be

critical from a client protection standpoint.

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Governance: A more robust board is critical for establishing a transparent organization and hence

channel used by the bank. While this is considered as one of the criteria while selecting and evaluation

the BC institutions, there are still gaps in the composition of board. A list of guidelines for good

governance will serve as a valuable tool for banks as they scale up and employ more BC institutions. The

role of important committees e.g. risk and audit committee must be defined as part of code of conduct.

Developing and Implementing Code of Conduct

The findings of the study have been deliberated with a working group comprising of BC institutions, banks,

representatives from self-regulatory organizations (MFIN, Sa-Dhan, and Business Correspondent Federation

of India). Based on the study and these deliberations, the following recommendations have been identified

for developing and implementing a code of conduct for credit-BCs:

Base it on MFIN/Sa-Dhan code of conduct: Some banks and BCs (especially BCs with previous

microfinance lending experience) are already partially following the MFIN/Sa-Dhan Code of Conduct.

Given its relevance for the microfinance client segment, this code could be adapted to suit the

requirements of the BC model.

Need for regulatory arbitrage: It is unlikely for such a code of conduct to be adopted voluntarily by the

banks unless there are formal guidelines from the RBI. Other self-regulatory organisations MFIN/Sa-

Dhan and BCFI cannot enforce this on the banks, and credit-BCs need to follow what their principle (i.e.

banks) prescribe. Therefore, more policy advocacy will be required with RBI to develop and release a

code of conduct for banks to follow and enforce for their BCs.

Convergence with the larger code of conduct for BCs: While this study and the resulting code of

conduct focuses on the credit aspect of the BC operations, it is important to converge this with the

larger initiative to develop code of conduct for BCs as a whole. This will require active advocacy and

liaison with the organisations working on the code of conduct.

Time frame for small BCs: It will be important to consider and acknowledge that not all BCs will be able

to fulfill the requirements of the code on conduct from day one. The smaller BCs will require more time

to comply to requirements such as governance and grievance redressal mechanism. Sufficient time will

have to be provided to them to set up systems to comply to the code of conduct.

Consider cost implications: The implementation of the code of conduct, and its monitoring and

reporting will require investment from banks, BCs, and the regulator. This will be an ongoing process

and hence the cost implications must be considered while developing the code of conduct.